What’s the latest danger to put your retirement at risk? Hype. In a statement made by Federal Reserve Chairwoman Janet Yellen, this new cause for concern is the increasing tendency for tech start-up companies to be extremely overvalued. At the conclusion of the latest Federal Open Market Committee meeting Yellen cautioned, “Valuation metrics in some sectors do appear substantially stretched—particularly those for smaller firms in the social media and biotechnology industries.”
Two days later, the New York Times published a cautionary story: “The retirement accounts of millions of Americans have long contained shares of stalwart companies like General Electric, Ford and Coca-Cola. Today, they are likely to include riskier private stocks from Silicon Valley start-ups like Uber, Airbnb and Pinterest.”
This is a problem.
On the surface, getting in early with these tech start-ups might seem like a shrewd and potentially lucrative investment. One of these companies could actually grow to be the next General Electric or Ford. It’s not likely, but it is possible.
But some of these tech start-ups experience such rapid growth that many investors and fund managers worry about missing the boat on the latest and greatest app or social media platform, so they end up leaping before they look. They get caught up in the hype.
And closer examination of these companies should give investors significant reason to pause. Many of these tech start-ups have yet to turn a profit or even prove that they have a legitimate business model. In fact, one of the biggest tech start-ups of the past decade, Twitter, has only recently shown that it is able to make money at all, and NINE years after its founding, the company is still operating at a loss. The company spends most of its money on R&D and acquisitions of smaller tech start-ups (that also possess questionable business models).
The New York Times piece lays out why you might want to think twice about your next tech start-up investment: many of these companies are essentially just making up how much they think they are worth. They get valued based on their hype.
“Because these tech companies are not required to issue financial reports and are not traded on traditional exchanges, they are the sort of speculative investments not normally found in retirement accounts. Increasingly, however, investors are betting that these companies will be bought or go public at prices that exceed their latest funding rounds, a prospect that is anything but guaranteed.”
You might think that you personally have nothing to worry about if you don’t own any tech stocks but you may be surprised to learn that whoever manages your 401(k) or IRA has already placed their bets. “Big money managers including Fidelity Investments, T. Rowe Price and BlackRock have all struck deals worth billions of dollars to acquire shares of these private companies that are then pooled into mutual funds that go into the 401(k)’s and individual retirement accounts of many Americans.”
Your retirement may already be at risk.
If the Federal Reserve Chair is cautioning that we could be in the midst of a bubble, we probably are. Many insiders are worried we could be facing a similar situation to what led to the dot-com crash of the late 90s. They say that history repeats itself. Tens of trillions of dollars could be at risk.
And when this bubble does eventually burst, even if you act fast, it may be too late.
The NY Times piece warns “This comes with plenty of risk. For starters, the fund is made up of shares that are illiquid, meaning they are hard to move under normal circumstances and nearly impossible to move when there is even a whiff of bad news about the company. Furthermore, many of the larger and early-stage investors have perks that no normal person can get. Preferred investors, for instance, are often first in line to get their money back, meaning that if the company is liquidated, they will be paid before other investors.”
One of the best ways to protect your retirement against market volatility is investing a portion of your wealth in gold and silver.